Daily Trading Insights & Tips

[tickmill-analytics]

Only strong US inflation in May can save USD

The dollar holds its ground on Tuesday counting on a strong positive surprise in the US May inflation report. The release is due on Thursday. Yellen's comments that high interest rates will be a plus for the economy went unnoticed by investors, since the rhetoric of the US Treasury head has no immediate consequences.

The ZEW report on the business climate in Germany for June fell short of expectations, but assessment of the current conditions beat forecasts. The mixed report deprived EURUSD of the opportunity to re-break the 1.22 level, as there is no over-optimism in the German economy and there are not so many reasons for the ECB to rush to tighten policy.

It is also worth paying attention to the NFIB report on small business in the United States. If it confirms that the reason for the weak May Non-Farm Payrolls was a lack of labor supply (as was the case in April), expectations for inflation in the United States in May will also have to be revised towards higher growth, since it is obvious that employers have to raise wages and these costs will translate into an increase in final prices. Recall that according to the Non-Farm Payrolls report, monthly wage growth was 0.5% (0.2% forecast), which indicates increased risks of accelerated US inflation in May.

Nevertheless, the Fed continues to believe and tries to convince market participants that the increased inflation rate will not last long, as it is caused by temporary drivers and technical factors such as the low base effect. Last year, in April and May, inflation reached a local minimum, after which it turned into growth. Compared to those months, inflation in April and May of this year can easily show high growth rates.

US trade statistics may also be in focus. The consensus on the data is reduction of the US trade deficit to $70 billion. However, the news that the US trade deficit has reached its peak is unlikely to help the dollar. In addition, the Fed is entering a blackout period - the Central Bank officials are silent for a whole week in front of the Fed meeting, so the dollar can only be supported by a strong inflation report. 

On Thursday, the ECB will meet and, in this light, mixed data on sentiment in Germany indicate that it doesn’t make sense for the bank to rush to slow down asset purchases. The ECB will likely prefer to focus on supporting a weak euro, and will also point to the risks of new virus strains and slow vaccinations as key risks which justify low rates and QE.

EURUSD pulls back today after the 1.22 test on Monday amid lack of optimism in economic data. If the uptick in US inflation in May does not meet expectations, the baseline scenario for EURUSD is continued rise in the second half of the week to the June high (1.225):

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Only strong US inflation in May can save USD

The dollar holds its ground on Tuesday counting on a strong positive surprise in the US May inflation report. The release is due on Thursday. Yellen's comments that high interest rates will be a plus for the economy went unnoticed by investors, since the rhetoric of the US Treasury head has no immediate consequences.

The ZEW report on the business climate in Germany for June fell short of expectations, but assessment of the current conditions beat forecasts. The mixed report deprived EURUSD of the opportunity to re-break the 1.22 level, as there is no over-optimism in the German economy and there are not so many reasons for the ECB to rush to tighten policy.

It is also worth paying attention to the NFIB report on small business in the United States. If it confirms that the reason for the weak May Non-Farm Payrolls was a lack of labor supply (as was the case in April), expectations for inflation in the United States in May will also have to be revised towards higher growth, since it is obvious that employers have to raise wages and these costs will translate into an increase in final prices. Recall that according to the Non-Farm Payrolls report, monthly wage growth was 0.5% (0.2% forecast), which indicates increased risks of accelerated US inflation in May.

Nevertheless, the Fed continues to believe and tries to convince market participants that the increased inflation rate will not last long, as it is caused by temporary drivers and technical factors such as the low base effect. Last year, in April and May, inflation reached a local minimum, after which it turned into growth. Compared to those months, inflation in April and May of this year can easily show high growth rates.

US trade statistics may also be in focus. The consensus on the data is reduction of the US trade deficit to $70 billion. However, the news that the US trade deficit has reached its peak is unlikely to help the dollar. In addition, the Fed is entering a blackout period - the Central Bank officials are silent for a whole week in front of the Fed meeting, so the dollar can only be supported by a strong inflation report. 

On Thursday, the ECB will meet and, in this light, mixed data on sentiment in Germany indicate that it doesn’t make sense for the bank to rush to slow down asset purchases. The ECB will likely prefer to focus on supporting a weak euro, and will also point to the risks of new virus strains and slow vaccinations as key risks which justify low rates and QE.

EURUSD pulls back today after the 1.22 test on Monday amid lack of optimism in economic data. If the uptick in US inflation in May does not meet expectations, the baseline scenario for EURUSD is continued rise in the second half of the week to the June high (1.225):

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Taper or not to taper early? US May inflation report should help the Fed to make up its mind

Oil prices rose on Tuesday continuing to develop modest upside momentum on Wednesday. WTI has broken the $70 per barrel mark for the first time since October 2018. The API data indicated a 2.11 million barrels cut in US oil inventories on the reporting week, raising the chances of a positive EIA report on inventories, which is slated for release today. Optimism about demand continues to drive price increases, which is partly justified by the fact that the pandemic is receding. The daily increase in the number of new cases of Covid-19 continues to decline while some health officials, like the head of the Ministry of Health of Norway, make extremely optimistic claims that the pandemic is nearly over.

OPEC acts as a counter-argument for the current oil rally, or rather, the cartel's excess production capacity of 6 million b/d. It is clear that these capacities will be gradually put into operation and if this is done in a weak market or coincides with the deterioration of the demand background (as was the case in March) prices may repeat the correction. Now OPEC production caps are factored in prices, however signals of improvement in demand continue to come. Prices will come under serious pressure closer to the next OPEC meeting.

Another important indicator of the market movement towards the reduction of excess oil reserves was the narrowing of the Brent-WTI spread. Now the WTI discount is only $ 2.3 per barrel, this is the lowest since November 2020 and indicates a faster expansion in the United States.

A short-term oil forecast from the EIA published yesterday showed that forecasts for the recovery of shale production in the United States for 2021 and 2022 have not changed much. This also supported prices, as it was the recovery in US production that prevented OPEC from effectively exercising control over the market.

The mix of the fresh upside leg in oil, declining chances an early QE tapering by the Fed and a flight of inflation to the Russian Federation in May sharply boosted appeal of carry trade, since the chances that the Central Bank of Russia will sharply raise the rate (for example, by 50 bp), thus expanding the differential rates, have gone up. The CBR meeting will take place on Friday and USDRUB is likely to continue to decline rapidly on positive expectations:

The major currency pairs remain in narrow ranges today in anticipation of the key US inflation report for May for this week, as well as the meeting of the European Central Bank. China released inflation data that pointed to an unpleasant trend of contraction in production margins (CPI falls, PPI rises), forcing the authorities to announce price controls. The key takeaway from the data is that inflationary pressures in the world continue to build up, so tomorrow we may well see an unexpected very strong rise in US inflation. However, due to the fact that last May inflation was very low (near zero), YoY gains should be attributed to a good extent to the low base effect, so the market's tolerance to higher inflation rate may be high. A surprise for the market is likely to be core CPI values above 3.7% or above 5% of broad CPI. If the data fails to meet expectations, we can expect a resumption of the downtrend in the dollar, since prolonged pause of the Fed in QE tightening, will lead to rotation into high-yielding currencies away from the USD, since other major Central Banks have clearly more hawkish policy stance. 

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Taper or not to taper early? US May inflation report should help the Fed to make up its mind

Oil prices rose on Tuesday continuing to develop modest upside momentum on Wednesday. WTI has broken the $70 per barrel mark for the first time since October 2018. The API data indicated a 2.11 million barrels cut in US oil inventories on the reporting week, raising the chances of a positive EIA report on inventories, which is slated for release today. Optimism about demand continues to drive price increases, which is partly justified by the fact that the pandemic is receding. The daily increase in the number of new cases of Covid-19 continues to decline while some health officials, like the head of the Ministry of Health of Norway, make extremely optimistic claims that the pandemic is nearly over.

OPEC acts as a counter-argument for the current oil rally, or rather, the cartel's excess production capacity of 6 million b/d. It is clear that these capacities will be gradually put into operation and if this is done in a weak market or coincides with the deterioration of the demand background (as was the case in March) prices may repeat the correction. Now OPEC production caps are factored in prices, however signals of improvement in demand continue to come. Prices will come under serious pressure closer to the next OPEC meeting.

Another important indicator of the market movement towards the reduction of excess oil reserves was the narrowing of the Brent-WTI spread. Now the WTI discount is only $ 2.3 per barrel, this is the lowest since November 2020 and indicates a faster expansion in the United States.

A short-term oil forecast from the EIA published yesterday showed that forecasts for the recovery of shale production in the United States for 2021 and 2022 have not changed much. This also supported prices, as it was the recovery in US production that prevented OPEC from effectively exercising control over the market.

The mix of the fresh upside leg in oil, declining chances an early QE tapering by the Fed and a flight of inflation to the Russian Federation in May sharply boosted appeal of carry trade, since the chances that the Central Bank of Russia will sharply raise the rate (for example, by 50 bp), thus expanding the differential rates, have gone up. The CBR meeting will take place on Friday and USDRUB is likely to continue to decline rapidly on positive expectations:

The major currency pairs remain in narrow ranges today in anticipation of the key US inflation report for May for this week, as well as the meeting of the European Central Bank. China released inflation data that pointed to an unpleasant trend of contraction in production margins (CPI falls, PPI rises), forcing the authorities to announce price controls. The key takeaway from the data is that inflationary pressures in the world continue to build up, so tomorrow we may well see an unexpected very strong rise in US inflation. However, due to the fact that last May inflation was very low (near zero), YoY gains should be attributed to a good extent to the low base effect, so the market's tolerance to higher inflation rate may be high. A surprise for the market is likely to be core CPI values above 3.7% or above 5% of broad CPI. If the data fails to meet expectations, we can expect a resumption of the downtrend in the dollar, since prolonged pause of the Fed in QE tightening, will lead to rotation into high-yielding currencies away from the USD, since other major Central Banks have clearly more hawkish policy stance. 

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

EIA data was a surprise for the market, casting doubts on US demand strength

Oil prices came under pressure on Wednesday, WTI struggled to stay above the $70 mark. The catalyst for the decline was bearish EIA report on commercial oil and refined products inventories in the United States. The report is now having a bigger impact on the market than usual, as it presents one of the major uncertainties on supply side. OPEC pumps oil in accordance with established quotas, and therefore supply from the cartel is more or less predictable.

The EIA report was a bit ambiguous as it contained both positive and negative information for the market. Stocks of crude oil decreased by 5.24 million barrels in the reporting week, confirming the API inventories data (which also indicated a reduction in reserves), nevertheless, refined products - gasoline, distillates and propane reserves jumped 20.71 million barrels which was a kind of a shock for the market:

The growth of finished products may indicate that the demand for them has decreased (i.e., fuel consumption in the United States has decreased) or supply has increased, or there was a combination of these factors.

In search of an answer to the question of what caused the increase in inventories, it is worth paying attention to the capacity utilization of refineries. The report showed that it rose 2.6% to 91.3%, the highest since January last year:

 

Taking into account the change in the activity of refineries, the change in demand for finished oil products turned out to be negative and amounted to -1.43 mln bpd. However, it should be borne in mind that we are approaching the travel season in the United States, which is a seasonal factor of increase in fuel demand.

On the supply side, the bulk of the negative news for the market comes from Iran. The country has ambitious supply growth targets, from 2.4 million bpd to 3.3 million bpd in the first six months to 4 million bpd. over the next six months, provided that the United States lifts the sanctions.

Iran's supply is expected to rise, however any news indicating progress in the nuclear deal could trigger a correction in the market, which, however, should short-lived as the demand side situation improves.

Later today, OPEC is to publish a monthly bulletin that will report on the cartel's production in May, as well as provide updated forecasts by the end of the year. On Friday, the IEA will release a report, which will also provide its views on the market. Both reports could cause increased price volatility, especially if the outlook changes for the worse, as the market remains fragile after recent gains.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

EIA data was a surprise for the market, casting doubts on US demand strength

Oil prices came under pressure on Wednesday, WTI struggled to stay above the $70 mark. The catalyst for the decline was bearish EIA report on commercial oil and refined products inventories in the United States. The report is now having a bigger impact on the market than usual, as it presents one of the major uncertainties on supply side. OPEC pumps oil in accordance with established quotas, and therefore supply from the cartel is more or less predictable.

The EIA report was a bit ambiguous as it contained both positive and negative information for the market. Stocks of crude oil decreased by 5.24 million barrels in the reporting week, confirming the API inventories data (which also indicated a reduction in reserves), nevertheless, refined products - gasoline, distillates and propane reserves jumped 20.71 million barrels which was a kind of a shock for the market:

The growth of finished products may indicate that the demand for them has decreased (i.e., fuel consumption in the United States has decreased) or supply has increased, or there was a combination of these factors.

In search of an answer to the question of what caused the increase in inventories, it is worth paying attention to the capacity utilization of refineries. The report showed that it rose 2.6% to 91.3%, the highest since January last year:

 

Taking into account the change in the activity of refineries, the change in demand for finished oil products turned out to be negative and amounted to -1.43 mln bpd. However, it should be borne in mind that we are approaching the travel season in the United States, which is a seasonal factor of increase in fuel demand.

On the supply side, the bulk of the negative news for the market comes from Iran. The country has ambitious supply growth targets, from 2.4 million bpd to 3.3 million bpd in the first six months to 4 million bpd. over the next six months, provided that the United States lifts the sanctions.

Iran's supply is expected to rise, however any news indicating progress in the nuclear deal could trigger a correction in the market, which, however, should short-lived as the demand side situation improves.

Later today, OPEC is to publish a monthly bulletin that will report on the cartel's production in May, as well as provide updated forecasts by the end of the year. On Friday, the IEA will release a report, which will also provide its views on the market. Both reports could cause increased price volatility, especially if the outlook changes for the worse, as the market remains fragile after recent gains.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Fed meeting impact will likely to be short-lived and here is why

Greenback holds position on Monday after the short-squeeze last Friday. Gold resumed its plunge while nominal yield on long-dated US debt (Treasuries) remained subdued – in overall this suggests that expectations of inflation overheating somewhat retreated. This could happen for two reasons - either markets feel that US growth rate cools down or they expect some updates on the Fed credit tightening. Considering that the FOMC meeting is around the corner, the reason is most likely the second.

The reaction in USD, gold and Treasuries suggest that asset prices factored in a possible change in the policy at the meeting on June 16. Interest rate and bond-buying pace are expected to remain at current levels; however, the Fed may start to talk about when it intends to scale back massive bond purchases. Even this slight policy tweak should have an impact, given that other central banks have taken the first step towards exiting the anti-crisis policy. Therefore, if there is a comment, a la "we start to discuss the timeframe of QE tapering", it is unlikely that this will cause a long-lasting surprise in the market.

But the Fed is hardly ready for anything more. There is actually no need for that. The comfortable US economic situation (aka “Goldilocks economy”) and looming summer calm in the markets are two key reasons for the Fed to be cautious and extend the wait-and-see stance. In addition, rising demand for long-term Treasuries since the beginning of June suggests that the Fed has managed to convince market participants that high inflation in April-May is temporary. So, there is no market pressure on the Fed to tell something about QE tapering. If the Fed rushes now with hints about reduction of asset purchases, it can sow doubts that inflation is completely under control. This is certainly not in the best interest of the Fed officials.

As a result, the emerging trend of this summer – search for yield amid subdued volatility - is likely to remain intact. Already on Friday, we saw strengthening of 10-year Russian bonds by 11 bp after Bank of Russia hiked key rate by 50 bp. The yields on «second-rate» Eurozone bonds - Italy and Greece - also declined, their spread to 10-year German Bunds dropped below 100 bp., indicating that investors are willing to take risk in exchange of returns. This week, investors to EM will likely pay attention to Brazilian Central Bank, which is supposed to raise interest rate by 75 bp. In general, there are clear signals that demand for risk is on the rise.

As one of the main funding currencies, greenback has inverse relationship with demand for risk, therefore, it’s likely that recent USD strengthening can be attributed purely to the FOMC even risk. The index may reverse in the area of 90.80-91.00 in the second half of the week:

 

Meetings of the Norwegian Central Bank and the Bank of Switzerland will also be held this week. The Central Bank of Norway gave a signal that it will tighten credit conditions, and the SNB, on the contrary, that it will not rush in this matter. Therefore, EURNOK and EURCHF may tend to move in different directions this week - the first is down and the second is up.

For EURUSD, the situation largely reflects the alignment of the dollar index: a potential downward movement on the FOMC will probably not go beyond 1.2075 from where a rebound can be expected:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Medium-term uptrend in EUR, GBP under threat after Fed surprise

The Fed left its policy unchanged yesterday, but the updated forecasts and dot plot showed that the Central Bank does not believe in its own story about temporary high inflation. The reaction of the markets was acute and should not surprise, given the fact that in the past few months, the Fed’s policymakers worked hard to convince investors that high inflation will not last long, and therefore will not impact rate hike outlook. It turned out that this is far from the case.

Compared to the previous dot plot, there have been significant changes: 13 out of 18 officials expect a rate hike of at least 25 bp. in 2023. There were only 7 of them in March. As for 2022, 7 out of 18 officials expect at least one rate hike; in March, the hawk camp was less numerous - only 4 policymakers.

The forecast for GDP growth in 2021 was revised upward by 0.5% - from 6.5% to 7%. Inflation, according to the forecasts of the Central Bank, will rise to 3% by the end of the year and then begin to cool down. Notably, the growth forecast for 2022 remained unchanged, and for 2023 it was raised from 2.2% to 2.4%, probably reflecting optimism about the infrastructure initiatives of the Biden administration.

The sharp increase in the degree of optimism in the Fed forecasts brings forward the start of quantitative tightening (QT), which was clearly demonstrated by the bearish reaction in the Treasury market. The yield to maturity of longer-dated bonds, which are more sensitive to changes in interest rates or inflation, soared from 1.49% to 1.59% on Wednesday. Clearly, there was a massive sell-off of longer-maturity bonds which boosted demand for cash. The USD index soared from the level of 90.50 and continues to rally today fueled largely by the Euro weakness, as it now turns out that the ECB is noticeably lagging behind other Central Banks in developed countries in tightening credit conditions.

Formally, the details of the QE tapering will likely appear at the conference in Jackson Hole in August or at the meeting in September.

The risk of an early tightening of credit conditions in the US makes the dollar less attractive for carry trades, so investor focus is likely to shift to EUR and JPY, further weakening these currencies against the USD.

Technically, an interesting situation arose in the EURUSD and GBPUSD pairs, where yesterday's fall sent prices to the lower border of the medium-term uptrend:

 

Breakout and consolidation below 1.1930 for EURUSD and 1.3890 for GBPUSD for several sessions may mean that the medium-term uptrend in the pairs is broken and, at best, we will see consolidation of EURUSD below 1.20 and GBPUSD below 1.40 with occasional sales in this summer. 

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Medium-term uptrend in EUR, GBP under threat after Fed surprise

The Fed left its policy unchanged yesterday, but the updated forecasts and dot plot showed that the Central Bank does not believe in its own story about temporary high inflation. The reaction of the markets was acute and should not surprise, given the fact that in the past few months, the Fed’s policymakers worked hard to convince investors that high inflation will not last long, and therefore will not impact rate hike outlook. It turned out that this is far from the case.

Compared to the previous dot plot, there have been significant changes: 13 out of 18 officials expect a rate hike of at least 25 bp. in 2023. There were only 7 of them in March. As for 2022, 7 out of 18 officials expect at least one rate hike; in March, the hawk camp was less numerous - only 4 policymakers.

The forecast for GDP growth in 2021 was revised upward by 0.5% - from 6.5% to 7%. Inflation, according to the forecasts of the Central Bank, will rise to 3% by the end of the year and then begin to cool down. Notably, the growth forecast for 2022 remained unchanged, and for 2023 it was raised from 2.2% to 2.4%, probably reflecting optimism about the infrastructure initiatives of the Biden administration.

The sharp increase in the degree of optimism in the Fed forecasts brings forward the start of quantitative tightening (QT), which was clearly demonstrated by the bearish reaction in the Treasury market. The yield to maturity of longer-dated bonds, which are more sensitive to changes in interest rates or inflation, soared from 1.49% to 1.59% on Wednesday. Clearly, there was a massive sell-off of longer-maturity bonds which boosted demand for cash. The USD index soared from the level of 90.50 and continues to rally today fueled largely by the Euro weakness, as it now turns out that the ECB is noticeably lagging behind other Central Banks in developed countries in tightening credit conditions.

Formally, the details of the QE tapering will likely appear at the conference in Jackson Hole in August or at the meeting in September.

The risk of an early tightening of credit conditions in the US makes the dollar less attractive for carry trades, so investor focus is likely to shift to EUR and JPY, further weakening these currencies against the USD.

Technically, an interesting situation arose in the EURUSD and GBPUSD pairs, where yesterday's fall sent prices to the lower border of the medium-term uptrend:

 

Breakout and consolidation below 1.1930 for EURUSD and 1.3890 for GBPUSD for several sessions may mean that the medium-term uptrend in the pairs is broken and, at best, we will see consolidation of EURUSD below 1.20 and GBPUSD below 1.40 with occasional sales in this summer. 

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Next week could be tough for low-yielding EUR, GBP and here is why

May UK Retail sales came slightly worse than projections, following strong gains in April. However, like the United States, UK consumers boosted consumption of services that became available after economy reopening by cutting spending for retail goods. The data had little impact on the pound as FX markets appears to be pricing in implications of the June Fed meeting.

“Instead of a thousand words” in the official communique or Jeremy Powell's speech to signal the move to a tightening cycle, the Fed revised its GDP and inflation forecasts sharply higher:

The dot plot also showed that overwhelming majority of central bank policy architects see the interest rate at a higher level than it is now in 2023. This data was enough to predict a transition to the QE tapering at the end of summer.

On Friday, the dollar stalls near 92 points resistance level, enjoying its highest level since mid-April. The USD gains are broad. Trade weighted exchange rate of the US currency is up 1.5% this week, commodity currencies from the G10 sank 2.5% on average against USD. The factor of China's intervention in the commodity market (price control) joined the Fed's policy, which hit the currencies of countries expressing high sensitivity to price swings in commodities.

Nevertheless, the rally of US currency finds much less support from the Treasury market on Friday. The movements in yields during and after the Fed meeting are strange. Yields on bonds on the horizon of 5-30 years after the initial reaction to the Fed, during which they rose sharply, erased gains completely on Friday:

 

It’s also possible that the downside reaction in long-term bond yields could be market perception that the Fed signaled about policy tightening too early and now risks to slow down expansion because of that. In other words, markets could be pricing in a policy error from the Fed. 

Further prospects for the upward USD move will depend on the trajectory of yields. If their rally resumes, it will be much easier to see US currency gains as well.

The Fed move on Wednesday was good news for the ECB, as it definitely helped to curb appreciation of the euro. Trade-weighted exchange rate of the euro fell by 0.5% to the lowest level since July 2020. The ECB chief economist added fuel to the fire saying that even in September, the ECB may not have enough data to move towards tightening. Divergence of ECB and Fed policies unexpectedly changes its sign and now the markets expect the US Central Bank to move to tighten credit conditions earlier.

In the short term, the EURUSD growth attempt is likely to encounter resistance in the 1.1950-1.1980 area. Next week, the target for the pair will probably be the level of 1.1835 and then 1.17 closer to mid-summer.

The next week may also be vulnerable period for the GBPUSD. Despite the fact that the pound copes better with the onslaught of USD compared to the euro, thanks to the hawkish position of the Bank of England, the risk of worsening trade or political spat with the EU could increase pressure on the currency. The target for the pair is 1.38-1.3810 in the next trading week.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Next week could be tough for low-yielding EUR, GBP and here is why

May UK Retail sales came slightly worse than projections, following strong gains in April. However, like the United States, UK consumers boosted consumption of services that became available after economy reopening by cutting spending for retail goods. The data had little impact on the pound as FX markets appears to be pricing in implications of the June Fed meeting.

“Instead of a thousand words” in the official communique or Jeremy Powell's speech to signal the move to a tightening cycle, the Fed revised its GDP and inflation forecasts sharply higher:

The dot plot also showed that overwhelming majority of central bank policy architects see the interest rate at a higher level than it is now in 2023. This data was enough to predict a transition to the QE tapering at the end of summer.

On Friday, the dollar stalls near 92 points resistance level, enjoying its highest level since mid-April. The USD gains are broad. Trade weighted exchange rate of the US currency is up 1.5% this week, commodity currencies from the G10 sank 2.5% on average against USD. The factor of China's intervention in the commodity market (price control) joined the Fed's policy, which hit the currencies of countries expressing high sensitivity to price swings in commodities.

Nevertheless, the rally of US currency finds much less support from the Treasury market on Friday. The movements in yields during and after the Fed meeting are strange. Yields on bonds on the horizon of 5-30 years after the initial reaction to the Fed, during which they rose sharply, erased gains completely on Friday:

 

It’s also possible that the downside reaction in long-term bond yields could be market perception that the Fed signaled about policy tightening too early and now risks to slow down expansion because of that. In other words, markets could be pricing in a policy error from the Fed. 

Further prospects for the upward USD move will depend on the trajectory of yields. If their rally resumes, it will be much easier to see US currency gains as well.

The Fed move on Wednesday was good news for the ECB, as it definitely helped to curb appreciation of the euro. Trade-weighted exchange rate of the euro fell by 0.5% to the lowest level since July 2020. The ECB chief economist added fuel to the fire saying that even in September, the ECB may not have enough data to move towards tightening. Divergence of ECB and Fed policies unexpectedly changes its sign and now the markets expect the US Central Bank to move to tighten credit conditions earlier.

In the short term, the EURUSD growth attempt is likely to encounter resistance in the 1.1950-1.1980 area. Next week, the target for the pair will probably be the level of 1.1835 and then 1.17 closer to mid-summer.

The next week may also be vulnerable period for the GBPUSD. Despite the fact that the pound copes better with the onslaught of USD compared to the euro, thanks to the hawkish position of the Bank of England, the risk of worsening trade or political spat with the EU could increase pressure on the currency. The target for the pair is 1.38-1.3810 in the next trading week.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

USD, EUR, CAD weekly outlook: more hawkish Fed hints in cards 

Fed spokesman James Bullard dotted the i's, saying on Friday that Powell initiated discussion about reducing monetary stimulus (aka QE tapering). It is very strange that Powell himself did not report this at the press conference on last Wednesday, nevertheless the markets responded to the news accordingly. The US currency index climbed to 92.40 points, the highest level since April 12, Treasuries yields with maturities of 5 years or more tumbled to new local lows, pricing in lower risks of economic overheating. Several Fed officials are due to hold a speech this week, so bullish surprises may not be over for USD.

Back in April, Powell said that it was not the time to discuss slowdown in the pace of QE. Even earlier he was even more dovish stating his famous “we are not even thinking about think about raising rates”. The Fed position, as we see, is altering very quickly and it is clear that officials may be underestimating the pace of recovery from the pandemic.

An earlier roll-off of QE may indicate that the neutral interest rate (at which the tightening cycle will end) may be lower, which may have also boosted demand for long-term bonds. Implied date of the first-rate hike by 25 bp has been also brought forward to November 2022.

Clearly there is a room for development of the story with hawkish Fed which should improve USD position against currencies which offer low interest rates. The ECB and the Bank of Japan are noticeably lagging behind in hawkish rhetoric what increases the risk of more downside pressure in EURUSD and further gains in USDJPY. As for EURUSD, the target after downside breakout of the upward medium-term trend is horizontal level of 1.17, which will roughly correspond to the March high in USD index at 93.40:

 

Last week there was a strong decline, so the initial downside momentum has probably fizzled out and EURUSD is expected to rebound to 1.1920/40.
There is, of course, still a chance that Powell will correct his colleague during his testimonial before the US Congress on Tuesday, but if he confirms that the debate on tightening credit conditions has begun, the dollar could rise even higher.

China's intervention in commodity markets and tightening by the Fed also helped form a peak in commodity prices. Bloomberg Commodity index peaked out in early June and then fell to the level of early May and is unlikely to soon return to growth. This circumstance jeopardizes the further rally in commodity currencies - AUD, NZD, CAD. For example, in USDCAD, the price has broken through the downtrend line that formed in the middle of last year - definitely a negative signal for CAD growth prospects:

 

The calendar of events and economic reports on the EU is not particularly interesting, but it is worth paying attention to the speech of the head of the ECB Lagarde in the European Parliament. It is likely that she will gladly take the opportunity to highlight the difference in policy stances of the ECB and the Fed, so that it could further weaken the euro, realizing one of the ECB's key goals - to stimulate export sector.

The most important reports of the week will be the European PMI, which will be released on Wednesday, the decision of the Bank of England on Thursday (which by the way has every chance to support the pound), as well as the US inflation report (Core PCE) for May. The weekly report on US unemployment benefits may have a material impact on market sentiment, given the great importance of the upcoming June NFP.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

USD, EUR, CAD weekly outlook: more hawkish Fed hints in cards 

Fed spokesman James Bullard dotted the i's, saying on Friday that Powell initiated discussion about reducing monetary stimulus (aka QE tapering). It is very strange that Powell himself did not report this at the press conference on last Wednesday, nevertheless the markets responded to the news accordingly. The US currency index climbed to 92.40 points, the highest level since April 12, Treasuries yields with maturities of 5 years or more tumbled to new local lows, pricing in lower risks of economic overheating. Several Fed officials are due to hold a speech this week, so bullish surprises may not be over for USD.

Back in April, Powell said that it was not the time to discuss slowdown in the pace of QE. Even earlier he was even more dovish stating his famous “we are not even thinking about think about raising rates”. The Fed position, as we see, is altering very quickly and it is clear that officials may be underestimating the pace of recovery from the pandemic.

An earlier roll-off of QE may indicate that the neutral interest rate (at which the tightening cycle will end) may be lower, which may have also boosted demand for long-term bonds. Implied date of the first-rate hike by 25 bp has been also brought forward to November 2022.

Clearly there is a room for development of the story with hawkish Fed which should improve USD position against currencies which offer low interest rates. The ECB and the Bank of Japan are noticeably lagging behind in hawkish rhetoric what increases the risk of more downside pressure in EURUSD and further gains in USDJPY. As for EURUSD, the target after downside breakout of the upward medium-term trend is horizontal level of 1.17, which will roughly correspond to the March high in USD index at 93.40:

 

Last week there was a strong decline, so the initial downside momentum has probably fizzled out and EURUSD is expected to rebound to 1.1920/40.
There is, of course, still a chance that Powell will correct his colleague during his testimonial before the US Congress on Tuesday, but if he confirms that the debate on tightening credit conditions has begun, the dollar could rise even higher.

China's intervention in commodity markets and tightening by the Fed also helped form a peak in commodity prices. Bloomberg Commodity index peaked out in early June and then fell to the level of early May and is unlikely to soon return to growth. This circumstance jeopardizes the further rally in commodity currencies - AUD, NZD, CAD. For example, in USDCAD, the price has broken through the downtrend line that formed in the middle of last year - definitely a negative signal for CAD growth prospects:

 

The calendar of events and economic reports on the EU is not particularly interesting, but it is worth paying attention to the speech of the head of the ECB Lagarde in the European Parliament. It is likely that she will gladly take the opportunity to highlight the difference in policy stances of the ECB and the Fed, so that it could further weaken the euro, realizing one of the ECB's key goals - to stimulate export sector.

The most important reports of the week will be the European PMI, which will be released on Wednesday, the decision of the Bank of England on Thursday (which by the way has every chance to support the pound), as well as the US inflation report (Core PCE) for May. The weekly report on US unemployment benefits may have a material impact on market sentiment, given the great importance of the upcoming June NFP.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

What we learned from the Fed this week. Is carry trade alive and well?

Central banks of major advanced economies and emerging market countries have recently expressed completely different views on further near-term evolution of price growth - the former believe that high inflation won’t last long, while the latter apparently do not agree with this. The Mexican Central Bank unexpectedly joined the Russian and Brazilian Central Banks, which began their tightening cycle relatively aggressively. The bank surprised investors on Thursday by announcing a rate hike from 4% to 4.25% in response to inflation running above 6%, which failed to cool down despite expectations. None of the Bloomberg economists surveyed expected this decision.

The peso strengthened against USD and, together with other EM currencies, now looks like an attractive territory for investors, as following the “parade of speeches” by the Fed officials this week, one can say that the debate about tightening of credit conditions has been postponed at least until the conference in Jackson Hole in August. Growing policy divergence between the Fed and EM Central banks as well as low volatility are expected to be the key drivers of carry trade flows.

 

Dynamics of major EM currencies against the dollar since the beginning of the week

The S&P 500 set a new record of 4,270 points on Thursday as Biden seems to be making success in getting his infrastructure plan through Congress. News came in yesterday that he managed to reach agreement with a number of Republican senators. Curiously, the plan includes stimulus, however provides little detail about tax increases. Those sectors, which seem to be hanging over by strict regulation and the treat of increased taxes can apparently relax for now. The combination of the fiscal package and absence of imminent tax hikes sets the stage for a modest summer rally in risk assets, given a period of low volatility, in which strong downside moves are not common to see. 

The final comment from the Fed this week came from Vice President Williams. Speaking on Thursday, the official chose to join his fellow hawks in stating that there is a risk of more upside in inflation and monetary policy must be prepared for it. Thus, he hinted that persistently high inflation readings will most likely force him to vote for reducing the pace of asset-purchases (QE) earlier than expected.  

In opposition to Williams and other hawk officials, chairman Powell spoke. On Tuesday, he said that the fear of high inflation isn’t a sufficient condition to start raising rates. The initial market reaction to Powell comments was as if the Fed had extended low-rate guidance, but trading in the second half of the week indicated that the market would likely start pricing in monetary policy tightening if inflation in the US exceeds the reading in May (5% in CPI) over the next two months or will continue to accelerate.

Many market participants do not share Powell's opinion on inflation. For example, BoFA in its latest report expects inflation to remain elevated for two to four years, and only a collapse in the financial market could prevent Central Banks from raising rates.  

The share of cash in portfolios of investors according to BoFa data is at 11.2%, which is well below the long-term averages. In the week ending Wednesday, investors bought $ 7bn in shares and $ 9.9bn in bonds, reducing investments in short-term money market instruments by $53.5bn.

In the second half of 2021, the key market topics, according to the BoFA, will be high inflation, the transition of global central banks to policy tightening and slowdown in economic growth.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Delta variant is getting on the market radar. What does it mean for equity markets?  

The newsflow related to the new Covid-19 delta variant is putting a dent on equity markets. What disturbs the most is that even countries with a high proportion of vaccinated people are forced to return some social curbs as this raises the question about vaccines efficacy. Some countries attempt to contain the outbreaks, others are taking preventive measures, however market worries stem from the fact that growing number of key economies are getting involved in this trend. Stock markets in Europe fell today after German newspaper Bild reported that in light of the threat of the new strain, European leaders will discuss measures for travelers returning from other countries. Tourism and travel sector led declines. Investors also reacted negatively to the news that Hong Kong has placed the UK on the list of countries with "extremely high risk", completely banning the entry of travelers from this country. The UK100 index posted the largest loss today among the major European indices, potentially reflecting investor doubts about the effectiveness of the Astra Zeneca vaccine against the new strain.

In the forex market, the dollar is taking a decisive offensive ahead of the June Non-Farm Payrolls report on Friday. The US economy is expected to add 700,000 jobs, which will increase the chances of an early start of tightening of the Fed policy. Last week, a number of representatives of the Fed spoke in favor of raising rates, only the head of Powell chose a bearish tone, but the impact of his remarks on the market was short-lived.

Last week, on Friday, data on US income and expenditures were released, which showed disappointing MoM gains. However, the main interest of the market was of course focused on inflation indicators. Annual growth of Core PCE, which is the preferred Fed measure of inflation, amounted to 3.4% in annual terms, monthly growth did not meet expectations. The US debt market apparently cheered bullish inflation release, yields of longer-maturity Treasuries dropped, indicated that investors flocked into bonds following release of the data.

Despite the fact that the Fed considers inflation to be temporary, it is at its highest since 1992:

 

There are many upside inflation risks, in particular if firms in the US continue to experience hiring problems. Like last time, the dollar may react upward, and Treasury yields will rise if the NFP report shows that monthly wage growth will again significantly exceed the forecast. This will most likely indicate that the labor shortage in the United States persists, which means that companies may be inclined to raise prices, shifting inflation to consumers. It is highly likely that the markets will perceive this as an increased risk of the Fed's sudden move towards tighter credit conditions.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Delta variant is getting on the market radar. What does it mean for equity markets?  

The newsflow related to the new Covid-19 delta variant is putting a dent on equity markets. What disturbs the most is that even countries with a high proportion of vaccinated people are forced to return some social curbs as this raises the question about vaccines efficacy. Some countries attempt to contain the outbreaks, others are taking preventive measures, however market worries stem from the fact that growing number of key economies are getting involved in this trend. Stock markets in Europe fell today after German newspaper Bild reported that in light of the threat of the new strain, European leaders will discuss measures for travelers returning from other countries. Tourism and travel sector led declines. Investors also reacted negatively to the news that Hong Kong has placed the UK on the list of countries with "extremely high risk", completely banning the entry of travelers from this country. The UK100 index posted the largest loss today among the major European indices, potentially reflecting investor doubts about the effectiveness of the Astra Zeneca vaccine against the new strain.

In the forex market, the dollar is taking a decisive offensive ahead of the June Non-Farm Payrolls report on Friday. The US economy is expected to add 700,000 jobs, which will increase the chances of an early start of tightening of the Fed policy. Last week, a number of representatives of the Fed spoke in favor of raising rates, only the head of Powell chose a bearish tone, but the impact of his remarks on the market was short-lived.

Last week, on Friday, data on US income and expenditures were released, which showed disappointing MoM gains. However, the main interest of the market was of course focused on inflation indicators. Annual growth of Core PCE, which is the preferred Fed measure of inflation, amounted to 3.4% in annual terms, monthly growth did not meet expectations. The US debt market apparently cheered bullish inflation release, yields of longer-maturity Treasuries dropped, indicated that investors flocked into bonds following release of the data.

Despite the fact that the Fed considers inflation to be temporary, it is at its highest since 1992:

 

There are many upside inflation risks, in particular if firms in the US continue to experience hiring problems. Like last time, the dollar may react upward, and Treasury yields will rise if the NFP report shows that monthly wage growth will again significantly exceed the forecast. This will most likely indicate that the labor shortage in the United States persists, which means that companies may be inclined to raise prices, shifting inflation to consumers. It is highly likely that the markets will perceive this as an increased risk of the Fed's sudden move towards tighter credit conditions.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Fears of new Covid-19 strain fuel risk-off USD rally

The Dollar rose to the weekly high amid flight of investors from risk assets in Europe and Asia. A growing number of countries announce restrictions and partial lockdowns (for example, in Australia) as well as impose travel curbs with certain countries. The United States has added Saudi Arabia to its covid list with the note “not desirable to visit” which is not a good sign for risk sentiment outlook. In addition to local sell-off in affected sectors, government responses force markets to take seriously the threat of the spread of the new strain. A direct consequence of this is an overall rise in risk aversion level.

The data on inflation in Germany were in line with the forecasts, however markets needed an upside surprise to keep the euro supported. The absence of inflation risks in the data is a favorable signal for the ECB, which seeks to delay the start of tightening policy. The report fueled sell-off in EURUSD.

From the technical point of view, EURUSD outlook is becoming more bearish. The price consolidated below the lower bound of the trend channel after the breakout, which increases the chances of a further decline:

The situation is similar in GBP, only the decline there is even more powerful, since the Bank of England disappointed with its policy decision last week while covid situation is apparently slightly worse than, for example, in Europe:

 

Despite the rise in cases, the hospitalization and death rates need to be closely monitored to see if the government can move to restrictions. If the numbers are favorable, the risks of new restrictions in GBPUSD will decrease, which will speak in favor of strengthening of the pair. However, it is too early to talk about it.

Currencies sensitive to oil prices suffered losses on Tuesday awaiting OPEC's decision to increase production by 500 thousand bpd. OPEC meeting is due later this week. The correction in oil may continue should key oil consumers roll out more restrictions, which will undermine the outlook for oil demand growth. 

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Preliminary data indicates US jobs market remained tight in June

European indices remain on a slippery slope due to expectations of new covid restrictions. Intraday losses range from half to one percent. The June inflation release in the Eurozone did not come with a positive surprise for the Euro, inflation rose in line with expectations, which allows the ECB to take its time to raise interest rates.

US data ahead of Friday's labor market report indicate a likely positive surprise. The Conference Board's Consumer Optimism Index rose more than expected, with significantly more respondents from the previous month pointing to improved job opportunities and higher income.

The main indicator increased from 120 to 127.3 points, which is only slightly below the maximum reached before the pandemic. The average consumer optimism index over 20 years is 94.7 points, from this point of view the June reading is really encouraging. Interestingly, both the current conditions index and the expectations index rose, which sets the stage for extension of the positive trend in the next few months.

Before the NFP report, it is import to look at the details of the report that are related to the labor market. The share of respondents who believe that vacancies are plentiful (54.4%) minus the share of respondents who believe that it is difficult to find a job (10.9%) has reached its highest value since 2000:

 

The value and monthly dynamics of the indicator suggests that the demand for labor continued to grow at a decent pace in June. Surprisingly, this may negatively affect the payrolls indicator, since at the same time with the growing demand, there is a shortage of labor supply, which slows creation of jobs. Some workers see no reason to discontinue receiving government benefits and payments, some parents were forced to stay at home because some US schools still conduct remote studies. There is also a part the workers who lost their jobs and decided to retire as the stock market boosted their pension savings over the year. In general, there are several factors that are holding back the growth of labor supply, creating unusual tensions in the labor market, where employers must compete for workers.

Monthly growth in wages is likely to be stronger than forecasts, which should increase pressure on the Fed to raise rates and cut QE. Risks to the dollar and long-dated bond yields are skewed upside what could explain strong dollar performance this week and prevailing pressure in USD currency pairs with major opponents.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

[tickmill-analytics]

Preliminary data indicates US jobs market remained tight in June

European indices remain on a slippery slope due to expectations of new covid restrictions. Intraday losses range from half to one percent. The June inflation release in the Eurozone did not come with a positive surprise for the Euro, inflation rose in line with expectations, which allows the ECB to take its time to raise interest rates.

US data ahead of Friday's labor market report indicate a likely positive surprise. The Conference Board's Consumer Optimism Index rose more than expected, with significantly more respondents from the previous month pointing to improved job opportunities and higher income.

The main indicator increased from 120 to 127.3 points, which is only slightly below the maximum reached before the pandemic. The average consumer optimism index over 20 years is 94.7 points, from this point of view the June reading is really encouraging. Interestingly, both the current conditions index and the expectations index rose, which sets the stage for extension of the positive trend in the next few months.

Before the NFP report, it is import to look at the details of the report that are related to the labor market. The share of respondents who believe that vacancies are plentiful (54.4%) minus the share of respondents who believe that it is difficult to find a job (10.9%) has reached its highest value since 2000:

 

The value and monthly dynamics of the indicator suggests that the demand for labor continued to grow at a decent pace in June. Surprisingly, this may negatively affect the payrolls indicator, since at the same time with the growing demand, there is a shortage of labor supply, which slows creation of jobs. Some workers see no reason to discontinue receiving government benefits and payments, some parents were forced to stay at home because some US schools still conduct remote studies. There is also a part the workers who lost their jobs and decided to retire as the stock market boosted their pension savings over the year. In general, there are several factors that are holding back the growth of labor supply, creating unusual tensions in the labor market, where employers must compete for workers.

Monthly growth in wages is likely to be stronger than forecasts, which should increase pressure on the Fed to raise rates and cut QE. Risks to the dollar and long-dated bond yields are skewed upside what could explain strong dollar performance this week and prevailing pressure in USD currency pairs with major opponents.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

[tickmill-analytics]

Dollar rise may continue this week. What are the key resistance levels?  

The Dollar index resumed rally on Monday amid signs of renewed distress in equity markets. Demand for Dollars could also start to pick up as investors price in potential bullish surprises in the June US CPI release on Tuesday as well as Powell speech on Tuesday and Wednesday.

In the second half of the last week, greenback rally took a short break as June Fed meeting Minutes failed to provide an evidence of a hawkish shift in the Fed’s stance. Recall that after the FOMC meeting in June, there was a growing perception that the Fed may start to taper QE soon and wants to send markets a signal about that. The release of the Minutes lowered chances of this outcome as emphasis in the report was that the goals to reduce unemployment have not been achieved and therefore it is too early to adjust stimulus settings. At the same time, it was noted that the topic of QE tapering did come up in the debates. 

The dollar was selling moderately last Thursday and Friday, with the price bouncing off the upper border of the mid-term trendline:

 

The 100-day SMA is entering a rally for the first time in a long time, and the 200-day SMA also appears to be making a low. The price is close to the moving averages, from this point of view, it will be easy to develop the upward momentum. Breakdown and consolidation above the 92.75 level may become a signal for medium-term purchases.

A strong US CPI report may act as a catalyst for an upturn, but it’s tough to expect inflation to be much higher than forecast. Starting in June, the influence of the low base effect (purely technical factor of increased inflation readings) has been reducing, in addition, the CPI and PPI of China for June, which contribute to the growth of inflation in the rest of the world, have also disappointed:

In China, the PBOC suddenly lowered the banking reserve ratio. This measure means that the central bank eases monetary policy and is designed to free up liquidity for lending or accumulating more assets on banks’ balance sheets. The PBOC often takes this measure when authorities anticipate a weakening of economic activity or an increase in bad debts. In this case, the amount of funds that banks can direct to long-term assets will be about 1 trillion yuan which is considerable as the total private debt is about 18.5 trillion yuan. The PBOC’s decision to ease monetary policy may also reflect concerns about inflation dynamics in June.

The second potentially negative signal from the PBOC can occur on July 15 when it will decide on the medium-term financing rate. If PBOC decides to cut the rate, coupled with the decrease in RRR, this can be perceived as an attempt to stimulate lending activity, at a time when the economy is seemingly on the solid footing. This could be a risk-off signal for financial markets. 

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

[tickmill-analytics]

What to expect from the Fed meeting this week? Technical setup in EURUSD

Despite the shocks associated with local Covid-19 outbreaks and calm summer season, stock markets find the strength to reach fresh peaks. On Friday, SPX broke through resistance at 4400 as the US economic data and expectations regarding the Fed meeting favored the risk-on move. On Monday, there was a slight pullback that affected all major asset classes. Longer-maturity bonds saw increased demand while risk appetite somewhat eased. Emerging market and commodity currencies stayed under pressure while oil price failed to score additional gains. Gold rebounded. USD stayed offered which is somewhat unusual when combined with broad weak equity performance, however the sell-off could be due to the uncertainty about upcoming Fed meeting, where Powell may disappoint fans of tight monetary policy if he again focuses on employment challenges in the US.

The correction last week failed to gain momentum as the key selling trigger - local Covid-19 outbreaks and associated potential economic setback - quickly proved to be unsustainable. Markets were fast to discount the gloom as several data sources indicated growing evidence that correlation between growth of daily cases and deaths weakened, especially in countries with high vaccination rates:

The decision of the UK to announce complete lifting of restrictions, despite the surge in incidence, did not seem very far-sighted and even provoked a negative reaction in the GBP, but now the authorities' calculation is clear.

What we need to know before the July Fed meeting? According to the new concept of monetary policy, the Fed will do its utmost to strengthen employment, more precisely to increase its inclusiveness - to involve in work as many people as possible, including people from vulnerable groups. Willy-nilly, the Fed will have to sacrifice price stability, i.e. let inflation fly over the 2% target in this economic cycle. With 6 million fewer employed compared to the pre-crisis period, despite an impressive rebound, the Fed has very little incentive to respond by raising rates to increased inflation rates provided it is seen as temporary. Any, even the slightest hint of a faster monetary policy tightening is likely to lead to a sell-off of risk assets, large USD and Treasury gains as additional hawkish Fed shifts after very hawkish dot plot update in June seem unlikely. 

In case of a dovish stance of the Fed at the meeting on Wednesday, the divergence of policies of the Fed and the ECB should weaken a little and EURUSD may have a chance to recoup losses in August. From the point of view of technical analysis, on the daily EURUSD chart, one can consider the falling wedge pattern, which in the classical literature is considered as a reversal formation. Possible entry points for a long can be 1.17 (1) and 1.175 (2):

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Cautious Fed tone fuels risk taking. What’s next for EURUSD, GBPUSD?

The Fed took another timid step towards tightening monetary policy at yesterday's meeting. The Central Bank also acknowledged that increased inflation may linger longer than originally anticipated. However, judging by the reaction of the dollar and bonds, the markets expected more aggressive rhetoric.

The Fed noted yesterday that the economy is heading in a direction that implies a move towards tighter credit conditions, but Powell said it will take a little more time to be convinced of the success of employment growth. Clearly, the debate over when to start cutting the $120bn QE is heating up, but it is unlikely that the Fed will formally announce it before December. Also, yesterday's meeting revealed a few details about how the QE cut will take place. By all appearances, the sale of MBS from the balance sheet will be carried out last, however, the monthly rate of purchase of Treasuries will decrease faster than MBS. However, market interest rates have been wary of the Fed's seemingly hawkish communication:

In addition, comments on inflation and the third wave of covid were more optimistic than anticipated. Powell reiterated its view that current high inflation is temporary however he also noted that there are risks of its acceleration. The increase in the number of new cases of Covid-19, according to Powell, calls for caution, but there is still no consensus on the economic damage from the third wave. The balance of optimism and caution in the Fed's communication leaves room for the regulator to shift to expectations that the federal funds rate hike will begin in 2022. Market expectations price in the first rate hike no earlier than 2023.

The dollar continued to decline after the Fed meeting in line with the idea discussed yesterday. Markets were obviously expecting a more hawkish stance from the Fed in view of the latest developments in US inflation, but instead they saw an extension of the wait-and-see attitude. The dollar index fell to a monthly low of 92 points, EURUSD rose to a two-week high, and GBPUSD was at a one-month high, due to increasing divergence of the policies of the Bank of England and the Fed. Recall that the Bank of England continues to lean towards the need to start raising rates, since the risks of economic damage from the third wave of covid, even after the complete removal of social restrictions, are decreasing. This is indicated by the growing gap in the rate of daily growth of new cases of Covid-19 after the lifting of restrictions and the rate of hospitalisation:

German inflation and US GDP data for the second quarter are due later today. Moderate pressure on the US dollar is expected to develop if the data exceeds expectations, as it will show that the Fed's dovish stance continues to be coupled with strong economic expansion in key developed economies, resulting in increased demand for risk.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

US yields are about to bottom out

The dollar starts off the week on a weaker footing, however there is a great chance that bearish pressure will ease as we get closer to Friday. At the meeting last week the Fed left the door open for rumours about a hawkish policy shift in August and the key missing piece that may boost the odds of such an outcome is an upside surprise in the NFP report this Friday. 

The number of new jobs created in the economy (aka Payrolls) has taken center stage in the post-pandemic period in terms of impact on the Fed decisions. It is expected to post decent 900K gain. Stronger-than-expected Payrolls reading will likely fuel speculations that the Fed will hint about QE tapering during Jackson Hole Conference in August. In this case, the market will start to price in decreasing demand in the Treasury market (as a result of slowing Fed purchases) and given the passage of Biden infrastructure plan, which will be financed with new debt, investors may start to quit Treasuries en masse.

Recall that long-term Treasuries saw a strong rise in demand over the past two months (yield-to-maturity slid from 1.75% to 1.20%), however, neither weakening of global economic expansion, nor increased covid-10 risks, which were cited as primary catalysts of the move, didn’t started to materialise. According to JP Morgan, investors continue to fit bearish narratives into the Treasury bond rally similarly to the situation when they explained the Treasury sell-off caused by the actual rebalancing of Japanese investors before the end of the fiscal year (when the 10-year Treasury yields rose from 1.0% to 1.75% in 1Q) by sharply increased inflation expectations and growing risks of economy overheating. The investment bank points to the interesting fact that the latest slump in bond yields was not accompanied by a corresponding increase in open interest in Treasury futures, that is, investors did not make new bets on the deterioration of economic situation, but only adjusted the previous ones.

The sell-off in long-dated Treasuries earlier this year was accompanied by rebound in the dollar index from 89.5 to 93 points. The new wave of Treasury bond sales will most likely also provide strong support to the dollar. 

Preparations for this week's NFP report kicks off with today's ISM and Markit Manufacturing indices of activity. It is especially interesting to look at the dynamics of the sub-indices of employment and prices - the first will tell you what to expect from the NFP in the production sector, the second - whether the effect of delays and supply bottlenecks, as well as excessive strong demand, which slow down the economy, are disappearing. The key indicators of the report are expected to extend rise, i. e. the rate of expansion of activity in the sector remained positive in July. A weak report, in my opinion, will have a material impact on the market and will likely fuel more USD downside.

The ADP report and non-manufacturing PMI from ISM are due Wednesday. This time ADP lays down a more conservative estimate of job growth - only 700K (versus 900K NFP). Also pay attention to the hiring component of the ISM index - last month it was in the depressed zone and it is essential to see a rebound to expect strong NFP figure. The greenback are risk assets are expected to post pronounced reaction on release of the reports. 

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

 

What does ISM Manufacturing data tell us about July NFP?  

The latest CFTC data showed that investors continued to build up USD longs ahead of the Fed meeting in August. Given the downside in USD last week, this dynamic was quite unexpected. It can be assumed though that by selling dollars after the Fed, market participants were either taking profits or pursuing short-term speculative goals. The data also showed that more long positions of speculators were closed in CAD and NZD futures, i.e., in currencies that have a relatively high correlation with the recession-recovery cycle of the world economy. This fact, of course, does not inspire optimism.

Aggregated data on the currencies of the G10 countries showed that net long position on the dollar increased in the week ending July 27 from 1.5% to 3.0% of open interest. The dollar increased its advantage against all G10 currencies with the exception of the CHF.

The changes in the CFTC positioning data indicate an increase in bullish sentiment for the dollar, despite the negative reaction of the US currency to the July Fed meeting. This may indicate that underlying drivers of the weakness could be short-lived as Fed tightening is in cards despite relatively dovish message last week, which should offer broad support to USD. 

The July ISM Manufacturing Activity Report showed improvements in two key components - prices and employment. The purchasing managers said that hiring of workers increased compared to the previous month while the situation with high prices for raw materials also changed for the better. The hiring sub-index rose from 49.9 to 52.9 points:

At the same time, the prices sub-index fell from an extremely high reading of 92.1 to 85.7 points:

Despite the fact that the broad indicator fell short of forecasts, the details of the report pointed to the dynamics favorable for a strong NFP report on Friday, and hence the stronger dollar. Recall that the major constraint in the expansion of US jobs was the labor shortage. It is clear from the ISM report that the manufacturing sector has begun to see positive shifts for job growth.

The leading ISM new orders declined for the first time in several months (from 66 to 64.9), which may be an early sign that activity in the sector will soon plateau.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

What to expect on ADP report today? Medium-term analysis of NZUSD

The NZD rose nearly half a percent against greenback after data released Wednesday showed that New Zealand's unemployment rate returned to the record low level that was before the virus outbreak. The share of unemployed fell from 4.6% to 4.0% in July, well ahead of the modestly positive forecast of 4.4%. Wage growth rate advanced to the highest level in 13 years, which indicates a strong increase in pro-inflationary risks and will likely prompt a hawkish intervention of the Central Bank. The RBNZ is expected to raise the rate at the upcoming meeting, however, the upside potential of the NZD is far from being exhausted, given that there is a risk of a large rate hike by 50 bp at once, as well as the risk that the Central Bank will not rule out the possibility of more rate hikes, which could form sustainable bullish sentiment on the NZD.
From the point of view of technical analysis, the bullish scenario for the NZD can be supported by the following observations. On the weekly NZDUSD chart, we can see a wedge pattern, the formation of which began at the end of last year and continues to this day. The wedge has a negative slope relative to the main bullish trend, therefore it can be considered as a trend continuation formation. On a larger scale, the idea of a trend continuation looks even more plausible because the multi-year peaks are still far away:

In the past few weeks, NZDUSD has been in indecision, which can be concluded from the shape of weekly candlesticks that had long tails and small bottoms - intra-week fluctuations were characterized by both up and down movements with a slight advantage for sellers:

The bounce from the lower bound of the pattern two weeks ago and expectations regarding RBNZ decision which warrant sustainable upside sentiment suggest that bulls may venture a test of the upper bound of the pattern in the area of 0.7150-0.7170 in the coming weeks. 

On Wednesday, the dollar is trying to maintain the edge ahead of release of the first batch of labor market data for July - ADP report and ISM report on activity in the services sector. The situation in the manufacturing sector, as shown by a series of data earlier this week (ISM, factory orders, equipment spending) suggests contribution of the sector to the growth of payrolls in July likely beat forecast. However, the share of employed in mfg. sector in the total employment is relatively small, so the ISM report in non-manufacturing sector is much more important in preparing for the NFP. Employment in services sector is now highly subject to fluctuations induced by swings in consumer mobility and social restrictions. Let’s be careful here, since it was in July that the incidence of Covid-19 began to rise in the United States:

Correlation of covid daily cases growth with severity social restrictions is gradually weakening, but this process is slow, so rising incidence in the US in July could still have a drag on creation of jobs due to the pressure on services sector. A negative surprise in ADP and ISM is likely to trigger a wave of dollar sales as it would become more difficult to expect a strong NFP, which is the key report for predicting the Fed's policy move in August.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.